Feds Profit Too Much to End Wireless Spectrum Shortage

Thursday

The spectrum shortage that wireless carriers complain about is a profitable ruse.

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

WASHINGTON (TheStreet) -- It's practically a rite of spring.

The mobile carriers scream about a coming shortage of spectrum. The government replies with plans to auction more.

It happens so often we take it for granted. But is it really true? Could the solution to the "spectrum crisis" lie in the government buying rather than selling the people's airwaves?

I think so.

Despite having begun as digital systems, mobile networks are not the Internet. They were digitized to squeeze more voice calls onto narrow wires. The whole system is pre-Internet, geared to voice rather than data.

All the major wireless networks own spectrum, bought in auction from the government. The largest holders are AT&T (:T) and Verizon (:VZ) (VZ). Sprint (:S) and T-Mobile, a unit of Deutsche Telekom, also own large chunks of spectrum to handle wireless calls. But the business is consolidating -- the FCC recently rejected AT&T's purchase of T-Mobile, and Verizon is seeking approval to buy spectrum from a consortium of cable companies,

The Internet isn't like that. On the Internet, one set of compatible infrastructure is shared by all carriers. Peering agreements assure that everyone gets their investment back. The only non-duplicated bits are the "last mile" on either end. You pay at your driveway to use the highway, and your money goes back to the highway builders based on negotiated formulas.

On a wireless call, spectrum is the wire, radios the infrastructure. Why are all wires considered property and most of the radios incompatible with each other?

Traffic is increasing, as the carriers say. It costs money to add radios to a network. But each generation of carrier radios is better than what came before, so much so that all the carriers now have a negative return on invested capital.

It's Moore's Law in action. Your PC loses its value quickly because new, cheaper technology becomes available. The same is true here.

This negative return is driving out competition. Clearwire (:CLWR) is now worth barely over $2 billion, and Sprint $7.6 billion, because they can't get enough traffic to pay capital before it becomes worthless. We will soon be left with only two viable carriers, and maybe they will have the market control needed to earn monopoly rents. Compare your wireless bill to a friend's in Europe or Asia and you might say they already have that power.

Why isn't the wireless Internet more like the wired? From a purely technical standpoint that is starting to happen. Carriers are slowly adopting a new LTE Advanced standard - often advertised as 4G - and Wi-Fi radios compatible with that standard are coming.

All that's left is to start holding more spectrum "wires" in common, as Wi-Fi spectrum is held in common. Let those who build infrastructure recoup those costs through peering agreements -- the money paid out from local access contracts as with today's Internet.

With one compatible infrastructure, with quick connections to the wired Internet a financial no-brainer, and with an ocean of spectrum that can be re-used as Wi-Fi, carriers will be free to compete at the edge or in the core, and the spectrum shortage will disappear.

Start by buying back the frequencies of the failing carriers, adding them to what's available on Wi-Fi and defining service through equipment. Spectrum sellers can use the cash to build out their infrastructure. This "network sharing" idea is already being discussed within the industry.

But that would make too much sense -- can't have that in government policy. Not when the government makes so much from spectrum sales. Not when government is in on the artificial shortage.

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